Should the Government Partially Refinance Mortgages?

Martin Feldstein has a bright idea: allow homeowners to refinance 20% of their mortgage balances with the government, where the new loans amortize over 15 years and reset every two years at the interest rate on 2-year Treasury bonds (currently 1.6%).

Mark Thoma worries that participation won’t be high; I worry rather that participation will be too high. Would this program be available to anybody? Offering 1.6% loans to the entire homeowning population doesn’t strike me as particularly intelligent fiscal policy. And even if it’s available only to people with outstanding mortgages as of a certain date, it’s sure to be taken advantage of by prime borrowers with lots of positive equity – people the government has no need to subsidise in this manner.

Feldstein’s motivation is noble: he wants to minimize the number of houses finding their way onto the market as a result of foreclosure. I think a better way of doing that is the proposal put forward by Baker and Samwick – did that get any traction at all?

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